Middle East Sovereign Funds Not Very Transparent

A bunch of the world’s sovereign wealth funds got together in 2008 to address a growing tide of concern about the political dimensions of their investments. The funds wanted to assure everyone that they were in fact very ordinary investors with no objectives outside of a financial return.

Five years on, however, a new report says many Middle Eastern funds still aren’t complying with the voluntary regulations that came out of that meeting: the so-called Santiago Principles.

Bahrain’s Future Generations Reserve Fund was ranked at the bottom of political consulting firm GeoEconomica’s 2013 Santiago Compliance Index, with a 24% score based on an analysis of its compliance with the principles. The Qatar Investment Authority was second-to-last, with a 31% mark. The Kuwait Investment Authority and the Abu Dhabi Investment Authority did somewhat better, with scores of 52% and 53%, respectively.

Those numbers compare to a 94% compliance figure for Norway’s sovereign fund, which ranked first, and a 92% score for New Zealand’s Superannuation Fund, which came in second. Overall compliance was at 70%.

The GeoEconomica report singled out the QIA, which has been perhaps the flashiest Gulf state investor over the past several years, snapping up distressed assets in Europe and making splashy plays in Porsche and the London luxury department store Harrods through Qatar Holding, an investment arm. While the QIA has been one of the fastest growing funds, the report says, it hasn’t taken many of the Santiago principles to heart.

The QIA “fails to provide conclusive information about its mandate, finances, accountability and governance arrangements,” the report says. “QIA could substantially enhance its position as an established financial market participant if it made a bold move towards embracing and implementing substantial parts of the principles.”

The Gulf’s large pools of sovereign capital have long been some of the world’s largest; they’ve also long been some of the world’s murkiest. ADIA’s move to begin publishing an annual review a few years ago was seen as an important development, even if the fund didn’t reveal anything about its size or give precise details on its asset allocations. Most of the region’s other funds say little about what they’re doing with their money or the how much new funds are coming in.

But the primary aim of the Santiago Principles was to assure countries where sovereign funds were looking to invest that they were not seeking a political return. Even in that sense, the GeoEconomica report says, the region’s funds have a long way to go. Many funds retain political ties, and many globally operate at the behest of political entities as opposed to under a bureaucratic structure. Middle Eastern funds are under pressure to help fulfill domestic political objectives in the wake of the Arab Spring. Qatar appears to be especially comfortable using its financial might to establish and reinforce political ties as it tries to raise its international profile, the report says.

“Qatar, given its vulnerable geographic location and its vital dependence on the openness of international sea and potential land transit routes, must have an interest to develop international alliances to insure against further tension in the Gulf region,” the report says. “That rationale suggests that QIA’s investments have also focused strongly on assets in Europe and increasingly Asia to bolster political relations with financial commitments.”